You convert your deductions into basis by making an election under Code Section 266. There is something extraordinary about Code Section 266. Here it is:
No deduction shall be allowed for amounts paid or accrued for such taxes and carrying charges as, under regulations prescribed by the Secretary, are chargeable to capital account with respect to property, if the taxpayer elects, in accordance with such regulations, to treat such taxes or charges as so chargeable.
What is extraordinary is that’s the whole section. No sub-sections, paragraphs, sub-paragraphs. A single sentence. It has been handed down to us virtually unchanged from the 1954 Code, except that in 1977 they cut three words. We should get that team working on the rest of the Code.
Why would you want to do this ? There is a good chance that the deductions attributable to unproductive land held for investment will be of little or no current benefit. You may not have enough itemized deductions to exceed the standard deduction. The other “carrying charges” are investment expenses subject to the 2% floor. Both investment expenses and real estate taxes are alternative minimum tax preferences.
You can elect to capitalize any of the three classes – interest, taxes or “other carrying charges” on a year by year basis. It is important that you keep track of what you have elected to capitalize, because the whole point of the exercise is to have the capitalized expenses in your basis, when you sell the property.
Why is this Timely ?
The IRS in Private Letter Ruling 201319008 recently gave a partnership additional time to make the Section 266 election for two years. Apparently the partners had not been advised of the advantages of the election by their tax professional. I am not certain how easy it is to get a ruling like this, as there were some other peculiar circumstances cited. Nonetheless, it reminded me that many people are not aware of the availability of the election, which is actually rather handy. If you own some raw land, that causes you to go out of pocket each year, you should review whether you are actually getting any benefit from deducting the expenditures. If you are not, consider electing to capitalize. If the numbers are significant, you may want to consider applying to be allowed to make the election for earlier years.
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